What happened to the Great Deleveraging?

Back in the gloomy days of 2010, the phrase bandied around by many US economic forecasters was the appropriately foreboding ‘great deleveraging’.

This was an epoch-defining moment when US consumers would stop splurging on nice things like cars and TVs and hunker down to pay back their debts for decades to come.

The only problem was the ‘great deleveraging’ failed to show up.

New research from Barclays’ investment and wealth unit shows US deleveraging was at best modest and claims this conventional view of the crisis misled investors at the time – and could have actually cost them investment opportunities.

“The US consumer is one of wealthiest on the planet.” Barclays wealth chief investment officer Kevin Gardiner said at a briefing in Mayfair this morning. “The ‘great deleveraging' wasn’t necessary,”

To put it in perspective, he added that the net wealth of US consumers last year increased by more than the GDP of China, not to mention that US household's net worth as a multiple of GDP has also been stable for half a century.

Why did people predict something that may not have been necessary? The Barclays report explains.

“Most analyses of the debt crisis pay no attention to double entry book-keeping, or to equity investments or house values, but simply add up all gross debt, double and triple counting included.”

In one case, the report says, Ireland’s external indebtedness was overstated by roughly 900 per cent of GDP because it included the liabilities of its financial services centre, which is mainly comprised of fund managers domiciled there.

Recent figures for the third quarter of 2013 show total US consumer debt that still needs paying rose by its largest quarterly margin since 2008 – sign perhaps that we may be entering another phase, the 'great re-leveraging'.